The Wrong Way to Preserve Public Pensions

Last week we wrote about Minnesota and the collaborative process that led to the unanimous passage of pension legislation that will shore up the pension systems there. Minnesota showed the right way to do things: bring everyone to the table and negotiate in good faith. Other states have not followed this same path when dealing with public pensions. Kentucky also passed a major piece of pension legislation this year, but with a less positive outcome than in Minnesota.

More than a year ago, Kentucky Governor Matt Bevin began saying he would call a special legislative session to address public pensions and tax reform. He quickly dropped tax reform, despite Kentucky’s notoriously porous tax code, and said the special session would focus only on public pensions. Despite continuing to promise a special session throughout the fall, he never called one. Eventually, it became too late for a special session and the 2018 regular legislative session began in Kentucky.

Again, months went by with promises of legislation addressing public pensions, but nothing was introduced. Finally, in late February 2018, Republican senators in Kentucky introduced legislation and held a hearing. The bill, Senate Bill 1, passed out of the Senate State and Local Government Committee. It was expected to receive a vote on the senate floor, but due to intense and widespread opposition, a vote was never held and the bill was sent back to committee.

Again, weeks passed with no movement on legislation addressing public pensions. Finally, on one of the last days of the legislative session, a bill was introduced, voted on, and passed through both chambers of the legislature in eight hours. No hearings were held, an actuarial analysis was not done, and the text of the bill was not even publicly available until the day after it passed. Gov. Bevin signed the legislation about a week later. Kentucky’s Attorney General, Andy Beshear, along with the Kentucky Education Association and the Kentucky Fraternal Order of Police, immediately sued to stop the legislation because of the remarkably undemocratic process by which it was passed. In late June, a circuit court judge in Kentucky ruled that the legislation is unconstitutional for that very reason. It is expected that Gov. Bevin will likely appeal that decision to the state supreme court.

The passage of SB 151 in Kentucky is noteworthy for many reasons. For the purposes of this blog, let’s focus on one: public employees were never included in the process. Despite many months of promises of special sessions and legislation, public employees were not invited to come to the table and offer their suggestions for how to improve the funding of Kentucky’s public pensions. The entire process was conducted in secret, behind closed doors and away from public view. Those directly impacted by these proposals, public employees, were not given the opportunity to give their input although they have the most at stake. The entire process in Kentucky was ideologically driven by critics opposed to public pensions.

The difference in approach also shows in the outcomes in these states. In Minnesota, the successful result of negotiation and compromise meant that the state reduced its unfunded liability by more than $3 billion. In Kentucky, the state has saved no money, has done nothing to reduce its unfunded liability, and the legislation is tied up in court battles that will last for months. Even if the Kentucky Supreme Court were to rule that the bill is constitutional, which seems unlikely, analyses have suggested that the changes in SB 151 would actually cost the state billions of dollars in the years to come, rather than saving any money.

The contrast between Minnesota and Kentucky offers a very valuable lesson to governors, state legislators, and other policymakers: including public employees in discussions regarding their pensions will do a lot more good than excluding them. Public employees highly value their pensions and will fight back against efforts to gut them. If public employees are part of the process, they can and will work in good faith with policymakers to ensure the long-term security and integrity of their pensions.

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